Cost-benefit analysis, Microeconomics

Cost-Benefit Analysis

Cost-benefit analysis (CBA) is defined as a practical way of assessing the desirability of an investment taking a long term and wider view of all the relevant costs and benefits of a project. The long term view should essentially include both the immediate as also the future implications of the investment/project. Likewise, the wider view should take into account the side-effects of the investment/project to all the affected parties like persons, region, ecology/environment, etc. CBA is thus an enumeration and evaluation of all costs and benefits howsoever directly or indirectly related. Cost benefit studies in the context of economics of education, look at education as a market activity. Which course of action is profitable at any given point of time can be known through such studies.

This may not be of much help in large scale, macro level planning and investment decisions. But it will guide the planner and investor regarding the continuance or discontinuance of specific educational programmes or the consumer regarding private individual benefits. These studies are of more significance in economies where strong institutional systems for assessment and functioning of markets are established. Economies with centralised decision making arrangements offer less scope for benefiting from cost benefit studies. Cost benefit studies are, therefore, more meaningful only in a market economy. They are, however, relevant even in a mixed economy. But in economies which are highly centralised, that is, in a state where the decisions regarding production targets, avenues of production, investment decisions, choice of technology, employment generation, etc. are all vested with a central authority, there is no scope for speculation about alternative investment decisions in education.

The education sector will supply the manpower required for the economy which has already been set by the parameters of demand, that is the production and investment decisions. However, in a market economy, the state will have no control over capital availability in the economy. Capital will be vested in private individuals or corporate bodies. The state cannot speculate or make predictions regarding the product choice, technology choice or scale of investments in private capital markets. This is true of capital markets in mixed economies. For instance, nobody would have imagined a few years ago that Messrs Tata Company, who are premier and prominent producers of steel, would one day begin to produce and market as common an item of daily consumption as salt. Likewise, Messers Godrej Company produces refrigerators as well as toiletry soaps. Products of a capitalist may, therefore, range from luxury items to consumption goods of daily use.

The nature and quantum of diversification in an economy throws up specific demands to the employment market. The type of jobs in demand would in turn determine the expectations from the field of education to generate the required skills. When there are several educational programmes on a horizontal stretch, those programmes which are perceived to lead to higher earnings will become popular, especially so when they have similar levels of costs. They survive and others lose in competition. The employment market determines the relative value of the programmes.